Cost of Goods Sold (COGS): What it is and why is it important for your Restaurant?
If you’re in the food business in Malaysia, you’ve likely come across the term COGS, or Cost of Goods Sold. But what does it mean, and why is it so important for your business? COGS is one of the most critical numbers you need to track to understand how your business is performing. It tells you how much it costs to make the food you sell. Without knowing this, it’s almost impossible to know if you’re making a profit or losing money.
Let’s break it down in simple terms. COGS is the total cost of all the ingredients and materials you use to prepare your dishes. This includes everything from the vegetables and meat to the spices and oil. It doesn’t include things like rent, salaries, or utilities—those are operating expenses. COGS is just about the direct costs of the food you sell.
Why is this important? Because if your COGS is too high, you’re spending too much on ingredients, and your profits will shrink. On the other hand, if your COGS is too low, you might be compromising on quality, which can hurt your reputation. Finding the right balance is key to running a successful food business in Malaysia.
How to Calculate COGS
Calculating COGS isn’t as complicated as it might seem. The basic formula is:
COGS = Opening Inventory + Purchases During the Period - Closing Inventory
Let’s say you started the month with RM 1,000 worth of ingredients (opening inventory). During the month, you bought RM 3,000 more ingredients (purchases). At the end of the month, you had RM 500 worth of ingredients left (closing inventory). Your COGS for the month would be:
COGS = RM 1,000 + RM 3,000 - RM 500 = RM 3,500
This means it costs you RM 3,500 to make the food you sold that month.
But here’s the thing: manually calculating COGS can be time-consuming and prone to errors. That’s where tools like Food Market Hub come in. They make it easy to track your COGS accurately and in real time.
Why Tracking COGS is Crucial for Your Restaurant Business
Tracking COGS helps you understand how much it costs to prepare each dish. This information is vital for setting the right prices. If you don’t know your COGS, you might end up selling a dish for less than it costs to make, which means you’re losing money with every order.
For example, let’s say you sell a nasi lemak dish for RM 10. If your COGS for that dish is RM 7, you’re only making RM 3 in gross profit. But if your COGS is RM 9, your gross profit drops to RM 1. That’s a huge difference! By tracking COGS, you can identify which dishes are profitable and which ones need adjustments.
In Malaysia, where food costs can fluctuate due to seasonal changes and supply chain issues, tracking COGS becomes even more critical. For instance, the price of chicken or cooking oil might rise unexpectedly, impacting your overall costs. By keeping a close eye on COGS, you can adapt quickly and avoid losses.
How Food Market Hub Helps You Track COGS
Food Market Hub is a powerful tool designed to help you manage your COGS effectively. Here’s how it works:
- Dish-Level Tracking: You can see the COGS for each dish on your menu. This includes the cost of ingredients, yield loss (waste), and the gross profit. For example, if you’re selling a plate of char kway teow, you can see exactly how much it costs to make one, including the noodles, prawns, eggs, and sauces.
- Category and Branch Insights: You can organize your dishes by category (like appetizers, mains, or desserts) and by branch. This helps you compare performance across different parts of your business. Maybe your desserts are more profitable at one location but not at another. With this information, you can make smarter decisions.
- Real-Time Data: Food Market Hub updates your COGS in real time. This means you always have the most accurate information at your fingertips. No more waiting until the end of the month to find out how you’re doing.
- Profit Analysis: You can see the total sales, total cost, COGS percentage, and profit percentage for each dish. This helps you understand which dishes are driving your profits and which ones are dragging you down.
- Yield Loss Tracking: Food Market Hub also tracks yield loss, which is the cost of ingredients that go to waste. For example, if you buy a whole chicken but only use 80% of it, the remaining 20% is yield loss. By reducing yield loss, you can lower your COGS and increase your profits.
What Should COGS Be for Your Business in Malaysia?
The ideal COGS percentage varies depending on the type of food you serve. On average, most businesses aim for a COGS of 28% to 35%. This means that for every RM 1 you make in sales, 28 to 35 sen go toward the cost of ingredients.
However, this number can vary. For example, fine-dining restaurants might have higher COGS because they use premium ingredients, while hawker stalls or fast-food places might have lower COGS because they focus on volume. The key is to find the right balance for your business.
In Malaysia, where competition is high and customers are price-sensitive, keeping your COGS in check is crucial. For instance, if you’re running a mamak stall, you might aim for a COGS of around 30% to ensure you can offer affordable prices while still making a profit.
FAQs About COGS
1. What is COGS?
COGS stands for Cost of Goods Sold. It’s the total cost of all the ingredients and materials used to prepare the food you sell.
2. How do I calculate COGS?
You can calculate COGS using this formula:
COGS = Opening Inventory + Purchases During the Period - Closing Inventory
3. What should COGS be for my business?
Most businesses aim for a COGS of 28% to 35%. However, this can vary depending on the type of food you serve.
4. How can I reduce my COGS?
You can reduce your COGS by negotiating better prices with suppliers, reducing waste, and optimizing your menu to focus on high-profit dishes.
5. Why is tracking COGS important?
Tracking COGS helps you understand how much it costs to prepare each dish. This information is vital for setting the right prices and maximizing your profits.
Understanding and tracking COGS is essential for running a successful food business in Malaysia. It helps you make informed decisions about pricing, menu planning, and inventory management. With tools like Food Market Hub, you can easily track your COGS and take control of your profits.
Remember, the goal isn’t just to lower your COGS—it’s to find the right balance between cost and quality. By doing this, you can keep your customers happy while also keeping your business profitable. So, start tracking your COGS today and see the difference it can make for your business in Malaysia!
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